Harvard Business Online
Why Budgeting Drives Us Batty
Now that we are into the fourth quarter of 2009, many companies are deep into their budgeting process for 2010. Unfortunately for some of us, this budget process started many months ago and will continue for many more, well past the start of the new year. As one manager said, "We start budgeting around the middle of the year and finish around the same time the following year."
If this dynamic sounds familiar, you're not alone. One of the most frequent complaints I hear from managers is the complexity, detail and length of the budgeting and planning process—a process where they feel the massive data effort is not at all commensurate with the value created.
What's behind the pervasive sense that the budgeting process is broken? What can be done to make it simpler and add more value? Let's look at three common complexity-creators, each of which suggests opportunities for improvement:
Detail vs. accountability: In many budgets, managers need to specify an array of very specific line item expenses, ranging from office supplies to postage, while also predicting specific revenue breakdowns. These requests not only take time, but the accuracy of the numbers—predicted a year or more in advance—are usually low. Moreover, asking managers for this level of detail sends a message that they cannot be trusted to manage their areas and perpetuates a culture of micro-management. Why not aggregate these requests and hold managers accountable for running their businesses?
Yearly restart vs. rolling: Most companies start a new budgeting process every year with the assumption that the turn of the calendar is the magic time to question and reassess plans and goals. The reality is that managers should be constantly questioning their plans and goals based on current performance, market data, customer feedback, economic conditions, and other input. In fact, insisting that this is done once a year in fast-changing environments is likely a recipe for failure. Why not do rolling budgets that are adjusted every month or every quarter as needed?
Mechanics vs. dialogue: Many budgeting processes are driven by forms and templates that are sent from headquarters with instructions and guidelines. Managers then dutifully fill in their numbers and submit them—only to be asked to do it again because the rolled up numbers are not acceptable. In some cases this back-and-forth loop repeats multiple times, stretching over months. What's missing from this process is a rich dialogue between senior executives, managers and finance/planning people to talk through assumptions and issues. Why not increase the dialogue and short-circuit the cycles of frustration?
There's no doubt that the budgeting and planning process is important. But companies like GE, HP and others have proven that it doesn't need to be overly complex and last for much of the year. With the right level of accountability, timing and dialogue, budgeting can not only be simplified, but actually be a performance management tool that adds value and helps managers run their businesses more effectively.
Are you and your colleagues spending large chunks of time throughout the year on budgeting and planning? Does it have to be this way? What are your thoughts?